Investment property rental
Owning investment property rentals is a tremendous wealth building strategy. Thousands of individuals have amassed great wealth by investing in rental investment property.
Investment Property Rental .
Unfortunately, few investment property owners learn how to leverage equity in a way that maximizes tax deductions while creating and locking in equity gains. Instead, they leave themselves open to price fluctuations in the residential property market. These fluctuations can wipe out or severely reduce equity positions in property.
There is little doubt we are coming to the end of a huge boom market in residential properties. For the last four years, properties have appreciated at unheard of rates. The question, of course, is what happens when the market cools off. Will we simply see a price plateau or an actual drop in prices While nobody is sure, the clear consensus is property owners should move to preserve equity while they can.
Protecting equity gains in your investment property requires careful planning. The strategy is fairly simple, but can sound complex. Please keep in mind this is just an introduction to the investment property tax strategy. We will be happy to explain it in detail to you over the phone.
The investment property tax strategy protects your equity gains by separating and leveraging them. The leveraging process is best explained with an example.
Scenario 1 Without Tax Strategy.
Assume you purchased a rental property in 1999 for $250,000 with nothing down. As of July 2005, the combination of loan payments and appreciation has resulted in a gain of $250,000. You have amassed $250,000 in gains, but all of it is at risk. If prices drop twenty percent over the next year, you will lose $100,000 of your equity in the rental property.
Scenario 2 With Tax Strategy.
We are going to use the same exact scenario. It is July 2005, you have $250,000 in rental property equity, but all of it is risk. You decide to implement the investment property tax strategy and the following occurs.
Our goal is to protect the $250,000 in gain on the rental property while also maximizing tax reductions. The first step is to refinance the property with, typically, an interest only loan. A percentage of the equity gain is taken out of the property and placed into an investment grade insurance product. The equity percentage is arrived at by determining the payment amount you can afford on the loan. Typically, it is tailored to match your current loan payment amount.
Going back to our scenario, what happens if property prices pull back 20% over the next year You do not suffer the loss of $100,000 because the gain is sitting in your investment grade insurance product. Essentially, it is a wash and you have protected the capital gains while capturing a market based rate of return with no ;market risk .
Ah, but it gets better. .
The investment grade insurance product isnt just any policy. Instead, the policy we use is tied to a stock market index. What if the stock market suffers a loss Not to worry, this policy carries a guarantee that you will never lose a dollar, even if the market crashes. If the stock market did crash, the policy would simply credit you with nominal growth for the year in question. In all other years, the policy would grow tax-free.
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